Book Review

In today's supercharged media environment, there are an array of platforms attuned to interpreting the latest trends in business, entertainment and politics. An individual who can transcend these enclaves
possesses an abundance of power. Usually this realm is reserved for significant political figures, such as the U.S. president. But what happens when the radiance of power is tethered to a quasi-governmental officialwhose very utterances have the capacity to alter the expectations of the world's financial markets, solidify support for, or sow seeds of distrust against, proposed legislative policy, all the while garnering a spot on Saturday Night Live's Weekend Update segment? Welcome to the world of Federal Reserve Chairman Alan Greenspan, Time magazine's 1999 Man of the Year.

Though he has been the subject of countless articles and essays,
relatively few books have appeared about Chairman Greenspan and
thethus far, successfulpolicies he has helped to formulate
and implement. One such effort is David Sicilia and Jeffrey Cruikshank's
book The Greenspan Effect: Words that Move the World's Markets.
It's nothing more than the ability of the Federal Reserve chairman,
whether intentional or not, to move financial markets through the
spoken word.

This book is divided into nine parts, comprising 39 chapters. What makes
this book so unusual is that the authors cobble together vignettes from
"some 3,500 pages" of the Fed chairman's speeches and congressional testimony
between 1987 and 1999. As they demonstrate, the chairman has spoken on
a wide range of subjects. For example, readers will read the chairman's
views on the stock marketincluding the memorable "irrational exuberance"
phrase uttered in 1996 and the equity market collapse in 1987the
Asian crisis, the farm economy, Social Security reform and, of course,
a healthy dose of technological change and the so-called "new economy."
The ability to speak intelligently about a wide range of subjects has
been a key part of Greenspan's plan. This has not escaped the attention
of some who engage in similar efforts:

"The Fed Chairman has become some sort of a prophet from whom
people expect wisdom on all aspects of economic life. He is now
viewed as an expert not only on monetary policy, but on technological
change, Social Security, fiscal policy, and diverse other matters."1

Interspersed between the quotes pulled from the text of the speeches,
the authors attempt to explain what the chairman is really saying
and, where needed, provide some context for his remarks. Regrettably,
they fail much more often than they succeed. For example, since
the chairman's "irrational exuberance" speech is probably his most
famous, this is the authors' annotation of that particular line:

"Very interesting: The infamous, incendiary (emphasis added) phrase
is embedded in another rhetorical 'what if' question! The Fed chairman's
incidental reference to the recent Japanese debacle, of course, only
made the pronouncement more ominous." (p. 58)

Further:

One lesson we take away from the episode is the power of the sound
bite, especially from the lips of an influential figure who is essentially
unquotable." But the "real lesson" is that "Greenspan
knew (and knows) the power of his words. So why raise interest rates
when some modest posturing will do the trick?" (p. 61)

This is an extremely poor substitute for economic analysis. Instead
of explaining some of the basic financial economics behind the chairman's
thought processhow about a short discussion, for the lay audience,
of recent work by Jeremy Siegel, Burton Malkiel or Robert Shiller?they
quote bond traders and other Wall Street financial types who specialize
in pithy quotes: "Instead of raising rates, he's going to make speeches."
(p. 61) Such a tactic does nothing but reinforce people's prejudices and
ill-formed notions about Chairman Greenspan, the intricacies of making
monetary policy and the role of the Fed chairman in communicating the
inevitable tensions that surround the policy process.

These shortcomings aside, they pale in comparison to other more fundamental
errors that are littered throughout the book. In Chapter 2, the authors
set the table for the rest of the book by writing about "the Fed's
Levers of Power." Readers will learn the following "facts":
(1) the heads of the regional Reserve banks are governors (they
used to be called presidents); (2) in the mid-1990s the FOMC [Federal
Open Market Committee] began announcing its domestic policy directive the day after the meeting; (3) although the discount rate is not
the Fed's most powerful tool, it has become the leading indicator of
Fed policy. In a later chapter, they further assert that the markets
are becoming increasingly adept at accurately forecasting "discount
rate movements." One must conclude that they either see no difference
between the discount rate and the federal funds rateand hence the
federal funds future marketor that they really do believe, contrary
to reality, that the Fed and everybody else is rigidly focused on the
discount rate pronouncements.

Finally, in one of the most startling sentences in the book, the authors
casually assert that "understanding the Federal Reserve's stance
on education-or, more precisely, how Alan Greenspan thinks about American
educationcan provide clues to the Fed's overall orientation."
(p. 25) Sure, the Fed thinks about long-term issues of growth, of which
human capital is an essential part of the equation. But one would be hard
pressed to find discussions in the FOMC transcripts where this issue regularlyor
even irregularlyaffected the meeting-to-meeting decisions of the
Reserve Bank presidents and governors to alter the stance of monetary
policy.

These basic mistakes about the Federal Reserve System and the
policy process are unforgivable. As such, it is quite clear that
this book was neither written by economists, nor did an economistor
a noneconomist with any knowledge about the basics of monetary policyedit
this book.

These errors aside, there are a few valuable things that the reader
will get out of this book. Chief among these is the partial text
of the speeches themselves. They provide a useful guide to the chairman's
views on a bevy of important monetary policy issues, including issues
that neither he nor the Fed have control over, but which are nonetheless
topical and interesting from the public's point of view. Perhaps,
as Professor Barro implies, the Federal Reserve chairman should
not be in this business. But, in the absence of a credible alternativeafter
all, most well-known and highly respected academic economists would
rather publish in journals than to educate the public from the high-profile
perch of pedestals like The Wall Street Journal, The New York
Times and The Washington Postwould it
be preferable instead to have the average journalist and/or politician
instructing the public on the most important economic issues of
the day?

Also to their credit, they agree that Chairman Greenspan deserves
much credit for helping to sustain the strength and durability of
this record-setting expansion. The Greenspan-led FOMC has doggedly
ratcheted down underlying price inflation to rates not seen in more
than 30 years. All the while, contrary to the expectations of many
forecasters, growth of real output, employment and profits have
soared. Should he retire now, there can be little doubt that Chairman
Greenspan will be feted by economic historians as one of the greatestif
not the greatestFederal Reserve chairman.

Sicilia and Cruikshank argue that the legacy of Greenspan's successful
monetary policy is here to stay: "The fact is that no matter who
chairs the Fed in the early 21st century, it will remain in large measure
a Greenspan Fed." (p. 243) Can we as a society be so sure? A few
former Federal Reserve economists who are now ensconced in academia, while
acknowledging the impressive record of Chairman Greenspan during his tenure,
have their doubts.2 In their view, monetary policy might not be equally good after Chairman
Greenspan retires unless the process becomes less dependent on the personality
and wisdom of the chairman. That is, without an institutional structure
in place to focus on achieving and maintaining price stability, there
are no guarantees that future residents of the United States will be as
fortunate as those in the past 20 years or so have been. It is possible,
though, that the recent change in FOMC procedures, whereby it is more
difficult for the chairman to unilaterally pre-empt the committee's policy
moves, may minimize this "cult-of-personality" concern.

One thing is clear, however, if the public receives its knowledge of
monetary policy from individuals with only a superficial understanding
of the process, future Federal Reserve chairmen, governors and Reserve
bank presidents will probably find that the need to instruct, inform and
cajole the American people will be an ongoing endeavor.

Kevin L. Kliesen
Kevin Kliesen is an economist at the St. Louis Fed, where he has worked
since 1988. The bulk of Kliesen's duties comprise reporting on and analyzing
current U.S. and international macroeconomic developments and trends.
In his capacity as a business economist, Kliesen writes the bank's monthly
internal Report on Economic Activity, contributes to the
bank's quarterly Regional Economist and writes for other
Fed and professional economics journals. He is currently president of
the St. Louis Gateway Chapter of the National Association for Business
Economics.